How for-profit colleges can save themselves–and higher education

IBM's Watson computer helps show a fundamental shift in IBM's business model

For-profit colleges are on the ropes. Damaging congressional investigations, a bruising fight over new federal regulations, and a stagnant economy have all combined to reverse what had been unprecedented growth in for-profit enrollments. The latest numbers suggest that new student enrollments fell 14 percent at the top 10 for-profit universities, with giants like the Apollo Group and Kaplan University experiencing declines of more than 40 percent. As Bloomberg Businessweek reported last week, financial analysts now see an outlook for proprietary colleges that ranges from uncertain to gloomy.

Consumers and investors have reason to be wary. Federal statistics indicate that 25 percent of all for-profit students who started repaying their loans in 2008 had defaulted three years later. In public colleges, the comparable figure was just 10 percent. Although for-profits enroll only about 10-15 percent of all students, their students make up about 47 percent of all three-year loan defaults. By 2015, new federal regulations will cut off student aid dollars to for-profit programs whose graduates struggle to pay back their loans.

So what’s next for proprietary colleges and universities? If I knew that, I’d be raking it in with the short sellers rather than taking the bus to work every day. But it seems as though the for-profits would be wise to take a cue from other corporations that have reinvented themselves in the face of economic and political challenges. In particular, they may have a lot to learn from companies that evolved from producing and selling goods directly to consumers to providing services and expertise to other organizations.

In short, for-profit colleges should consider becoming the next IBM.

INTERNATIONAL BACHELOR’S MACHINES

In the middle of the last decade, IBM went from being one of the world’s leading manufacturers of personal computers to a firm that no longer sells PC’s to consumers; the company now provides software, IT service, and business solutions to governments and corporations. The shift has delighted stockholders, who have seen IBM’s profit margins consistently increase over the past six years, posting a return on equity that dwarfs the average among other American stocks. IBM’s evolution has been so successful that other competitors are now following suit. Just two weeks ago, Hewlett Packard announced plans to shutter its mobile phone and tablet business, sell off its PC division, and acquire a software company.

Where are the parallels with the for-profit college world? It’s simple. For a decade or more now, for-profit colleges have thrived by enrolling increasing numbers of new, mostly nontraditional students each year. In the process, the proprietary schools have learned a lot about how to grow capacity, how to leverage technology to create programs that fit student needs, and how to measure student learning and instructor effectiveness. After a decade of growth, though, all signs suggest that the supply of new for-profit students is on the decline and that the prior period of expansion is not sustainable. What’s more, many in the policymaking community eye the for-profits with increasing suspicion, leading to lasting political hurdles and headaches.

But President Obama has called for 8 million additional degrees by 2020, and for-profits now sit on a trove of expertise, infrastructure, and innovation that could be more thoroughly tapped to help produce them. For many for-profit colleges, the key to long-term profitability could be a move away from directly educating students to providing other institutions with their proprietary expertise in online learning and program design.

First, the for-profits have shown an ability to grow and expand their capacity. They have developed instructional models that fit the schedules of adult learners and created programs that respond to local labor market demand. Between 2000 and 2009, for-profit enrollments nearly quadrupled, going from 400,000 students at the start of the decade to about 1.58 million in 2009. At a time when community colleges have had to turn students away, the for-profits have shown that they can meet this additional demand. They have moved instruction online in order to free themselves from the constraints imposed by brick and mortar and geography. They have been quick to develop new programs that satisfy local labor market demand and the needs of nontraditional students. Outside of the most entrepreneurial community colleges (and there are some), this spirit is too often absent in the public sector. Traditional institutions who wish to grow but don’t have the wherewithal to do so would benefit enormously from a partnership with a for-profit provider that knows how to build capacity. While this is happening on a limited scale with boutique programs at select institutions (see Higher Ed. Holdings and 2tor), there seems to be an enormous market for this kind of reinvention.

Second, for-profits have experience serving higher education’s “new majority”: nontraditional students. Indeed, “nontraditional” students–part-time students, working adults, those with a GED rather than a high school diploma–now outnumber the “traditional” first-time, full-time student in overall enrollment. Unless we ensure that these students are successful in higher education, we won’t stand a chance of reaching our higher education goals.

Few institutions have had more experience serving working adults and traditionally under-represented students than the for-profit. Fifty-four percent of students enrolled in for-profit colleges are considered “high-risk,” compared to 36 percent of students in traditional community to two-year colleges. True, community colleges enroll lots of nontraditional students; but the country’s largest for-profits have done so at scale, providing them with reams of data and hundreds of thousands of student experiences to learn from. There are lessons to be learned here, but they are too often overshadowed by instances of scandal and abuse.

Third, the for-profits have shown a knack for getting students over the finish line in their two-year programs. Though graduates of two-year programs at for-profits are saddled with far more debt than their community college peers and default at higher rates, those who attend full-time are also much more likely to finish their degree in three years. The latest data available from NCES reveal that about 57 percent of first-time, full time two-year degree seeking students who started at a for-profit in 2005 finished within 150 percent of normal time. The analogous figure for public community colleges? Under 21 percent. President Obama says we need 5 million more community college degrees. The for-profits clearly know something about how to get there.

LET’S BUILD A SMARTER CLASSROOM

This is not an argument for or against for-profit colleges as currently conceived. It simply outlines one possible innovation in their business model that is less fraught with political obstacles. Providing expertise, infrastructure, and services to willing, entrepreneurial partners in the non-profit and public sectors would enable for-profits to accomplish two goals. First, the model would shift much of the risk inherent in educating nontraditional students to their partner organizations and provide for a more politically stable revenue stream. Second, this new arrangement would clearly harness their wealth of knowledge and innovative spirit to the nation’s new higher education goals. In the same way that IBM has burnished its image as a public problem-solver (the Smarter Planet initiative), enterprising for-profits could re-brand themselves as the private sector partners who are stoking America’s engines of human capital.

The question now: who’s going to be the first IBM of higher education to emerge from the for-profit world? I’ll be the first in line to buy their stock.